An Economic Way of Thinking

How can you think like an economist?

1.1 Introduction

Why are some people and nations wealthy and others poor? This simple-sounding question has no easy answer. In fact, over the past two centuries, some of the world’s best thinkers have wrestled with it. Their answers have generated many of the ideas and principles at the heart of the social science we call economics.

Among the first to consider this question in depth was a political economist and philosopher named Adam Smith. Born in Scotland, Smith taught at the University of Glasgow and later became Scotland’s commissioner of customs. He is best known for his book An Inquiry into the Nature and Causes of the Wealth of Nations, better known today as The Wealth of Nations.

Smith’s book was published in 1776, the same year the Declaration of Independence was written. The connection between The Wealth of Nations and the Declaration does not stop there. In his book, Smith argued that competition is the key to a healthy economy.. Nations prosper when buyers and sellers are free to do business in the marketplace without government interference. In the newly independent and liberty-loving United States, Smith’s ideas about competition and free markets took root and grew vigorously.

In The Wealth of Nations, Smith made many observations about people that still ring true today. For example, Smith observed,

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life.

In his 18th-century prose, Smith made the point that people want not only the basic necessities of life — food, clothing, and shelter — but also things that make life easier, or more convenient, and that entertain them. The more of such things they have, the richer they are, at least in economic terms.

Smith was not the first to explore everyday economic events. But he developed a way of thinking about those events that had a lasting impact and earned him the title “the father of modern economics.” Economists still read The Wealth of Nations to refresh their thinking about fundamental economic principles.

This chapter explores some of these principles and how they can help you develop an economic way of thinking. Along the way, the words of Smith and other economists are included to offer you guidance. The more you learn about how to think like an economist, the better you will become at making sound decisions in almost every area of your life.

Next Reading: 1.2 (What Is Economics All About?)